NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AA-' rating to the Port Authority of New York and New Jersey's (PANYNJ) $236.405 million 199th series consolidated bonds. The Rating Outlook is Stable.
RATING RATIONALE
The ratings reflect PANYNJ's mature, diverse and monopolistic transportation infrastructure asset base that provides critical service to the strong New York City metro area, supported further by a conservative debt structure. Its extensive capital plan and certain loss-making assets constrain the rating. Moderate leverage of around 8.5x (senior) and 9.5x (junior) is mitigated by robust debt service coverage ratios (DSCR) that average around 1.9x (senior) and 1.8x (junior) in the rating case, and are consistent with a 'AA' category rating according to criteria. Ramp-up of the World Trade Center (WTC) site has been encouraging.
KEY RATING DRIVERS
Resilient Revenue Base: Revenue Risk - Volume: Stronger: PANYNJ's portfolio of monopolistic, expansive and diverse transportation and real estate assets includes the four metro New York airports, interstate road, rail and ferry Hudson River crossings, and seaports. The region's diverse and populous economy as well as its status as a global center for commerce supports resilient demand and pricing power. Economic pricing flexibility may fall if WTC or Port Authority Trans-Hudson (PATH) transit assets underperform or if PANYNJ takes on additional loss-making assets.
Demonstrated Rate-Setting Flexibility: Revenue Risk - Price: Stronger: PANYNJ benefits from strong airport cost recovery in airline use agreements and proactive toll increases on its bridges and tunnels with minimal impact on traffic levels.
Extensive, Growing Capital Plan: Infrastructure Development/ Renewal Risk: Midrange: PANYNJ's current 2014 - 2023 capital plan totals approximately $27.6 billion, although Fitch understands that a revised 2017 - 2026 plan is expected to be published before year-end that will reflect additional commitments relating to the Gateway Project and Port Authority Bus Terminal amongst others. Cost and delay risk are meaningful for a plan of this scale and complexity. PANYNJ's target capital investment funding balance of 60:40 cash: debt (currently around 50:50) is appropriate for its financial profile.
Conservative Debt Structure: Debt Structure: Stronger (Senior)/ Midrange (Subordinate): The authority maintains a nearly 100% fixed-rate, fully amortizing capital structure. The subordinated nature of CP and PANYNJ's Goethals Bridge and 4 World Trade Center payment obligations behind the consolidated bonds results in a midrange score for these obligations.
Financial Metrics: DSCR is robust, expected to remain above 1.80x for consolidated bonds and 1.60x for subordinated special obligations in the Fitch rating case through 2020, which primarily reflects slower ramp-up of rental activity at the World Trade Center. Leverage is moderate, with net debt-to-cash available for debt service (CFADS) in the Fitch rating case remaining around 8.1x to 8.6x at the senior level and 9.1x to 9.6x at the junior level.
Peers: Closest peers are Port of Seattle ('AA'/Stable Outlook) and Massachusetts Port Authority ('AA'/Stable Outlook), both of whose debt is secured primarily on airport and port revenue streams. PANYNJ's diverse and high profile asset base is a significant strength; however, its significantly more involved capital plan coupled with a highly politicized operating environment place its ratings one notch below senior lien ratings for both peers.
RATING SENSITIVITIES
Negative: Slow revenue growth and/or higher rates of growth in operating expenses.
Negative: Significant escalation in capital needs and additional leverage not supported by revenue increases that cause DSCRs to remain below 1.8x/1.7x on a sustained basis at the senior and subordinated levels, respectively, or net leverage on total debt to remain above 10x for a prolonged period.
Negative: Significantly lower revenue than currently forecast from the World Trade Center site as a result of weaker rental demand, or a widening in sustained operating losses generated on the Port Authority Trans-Hudson transit network.
Negative: Political Intervention: Actions by either the state of New York or New Jersey to limit the authority's ability to raise tolls to cover growing debt service obligations, or significant new non-core state-mandated investment that puts additional strain on cash generative core assets.
Positive: None expected for the foreseeable future on account of PANYNJ's large capital plan.
TRANSACTION SUMMARY
PANYNJ is issuing $236.4 million 199th senior lien consolidated bonds. This bond issue was sold on a direct placement basis on November 1, 2016 with scheduled maturities from 2022 to 2031.
PERFORMANCE UPDATE
Operating performance during FY2015 was robust - gross operating revenue increased to $4.82 billion from $4.48 billion in 2014 (an increase of 7.7%), reflecting increases across all its main business segments - tunnels, bridges & terminals (TB&T) - saw gross revenue increase by 11%, PATH by 9%, aviation by 2%, and port commerce by 10%. Notably, revenue generated by the World Trade Center grew 141%, with ramp-up of the site broadly progressing in line with expectations.
Operating expenses for 2015 decreased by 1% to $2.9 billion versus the year prior, with significant expense reductions across its TB&T, aviation, PATH and development facilities more than offsetting a $66 million increase in World Trade Center operating expenses as the site transitioned towards full operations. The 1% decrease was in contrast to the 12.6% increase between 2013 and 2014, reflecting clear-up costs relating to, among other things, the severe winter of 2014 and significant cost increases at World Trade Center.
Year-to-date unaudited results through September 30, indicate mostly positive operating trends noted by a 4.6% increase in aviation activity, 3.0% increase in TB&T transactions, 3.8% increase at PATH passengers offset by a 2.7% decline in container throughput in the port division. On the revenue side, gross operating revenues increased 6.8% to $3.83 billion. All major operating divisions had revenue growth: Aviation (+3.8%), TB&T (+10%), PATH (+6%), WTC (+26.4%) and Ports (+3.1%). Biggest drivers were toll increases at bridges/tunnels and PATH as well as higher traffic at airports and more leasing revenues at WTC.
PANYNJ's current approved capital investment plan spans the period 2014 - 2023, and totals $27.6 billion over this period. Fitch understands that PANYNJ is currently working on an update to this plan that will involve an extension to 2026, partly motivated by the need to incorporate elements of the Gateway Project for which it is partially responsible as well as the Port Authority Bus Terminal project, among others, neither of which are reflected at all in the current capital investment plan. Although neither project has been fully budgeted nor, in the case of the Gateway Project, has it been established how responsibilities with respect to funding or project delivery will be divided across PANYNJ, USDOT, Amtrak, NJ Transit and the states of New York and New Jersey, we expect both projects to be substantial and PANYNJ's responsibilities large.
On the back of strong operating performance, financial metrics remained robust. Fitch-calculated senior DSCR was 2.04x and junior DSCR was 1.83x - both marginally lower than the prior year (2.11x and 1.86x, respectively), largely reflecting lower capitalized interest adjustments in 2015. Fitch notes that authority coverage calculations, including additional non-operating revenue items, are .35x to .40x above the Fitch adjusted results. Senior ND/CFADS (reflecting general reserve fund and consolidated bond reserve fund) was 7.9x while junior leverage (reflecting inclusion of gross debt secured on subordinate special payment obligations) was 8.9x.
FITCH CASES
PANYNJ financial projections reflect modest traffic growth assumptions across its main business areas. No further toll or fare increases are reflected for TB&T or PATH, with other business segments expected to see inflationary price growth. One WTC occupancy is expected to reach its stabilized occupancy level of about 92% by 2019 from its current level of 68% in October 2016. Over this period, rental rates are forecast to grow at just over 3% per annum. Overall operating expenses are forecast to grow between 3% and 4% in 2016 and 2017, largely driven by cost increases at the WTC site as it transitions to being fully operational, before falling to annual growth rates of 1%-1.5%.
Overall, Fitch considers PANYNJ's forecasts to be reasonable. The Fitch base case largely reflects PANYNJ's forecasts, with some minor adjustments to moderate revenue growth and to assume minimum operating expense growth rates to 2.5%. The Fitch Rating Case is designed to largely test lower WTC rental revenue, with 2020 WTC rent being around 14% cumulatively lower in this scenario than in PANYNJ's forecast and incorporate minimum operating expense growth rates of 3.0% over the forecast period.
Both Fitch's DSCR and leverage calculations exclude non-operating revenue except for passenger facility charges. In each of the three scenarios, DSCR remains robust, falling no lower than 1.80x at the senior level and 1.60x with respect to its subordinate special obligations, reflecting the authority's financial flexibility. While leverage is relatively high at around 8.0x to 8.5x at the senior level and 9.0x to 9.5x total, reflecting its significant capital investment obligations, PANYNJ's resilient, granular user base and significant pricing power provide substantial mitigants.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Rating Criteria for Airports (pub. 25 Feb 2016)
https://www.fitchratings.com/site/re/877676
Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)
https://www.fitchratings.com/site/re/882594
Rating Criteria for Ports (pub. 17 Oct 2016)
https://www.fitchratings.com/site/re/889015
Rating Criteria for Toll Roads, Bridges and Tunnels (pub. 11 Aug 2016)
https://www.fitchratings.com/site/re/886038
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014432
Endorsement Policy
https://www.fitchratings.com/regulatory
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
Copyright (c) 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001